Yesterday, the California Supreme Court issued a partial stay of the two California redevelopment agency overhaul statutes enacted in late June (ABX1 26 and ABX1 27), temporarily putting on hold the elimination of redevelopment agencies (“RDAs”) in California. This was in response to a petition for writ of mandate filed by the California Redevelopment Association and the League of California Cities challenging the validity of those statutes. The Court’s stay is the latest twist in the story of Governor Brown’s and the California legislature’s efforts to close the state budget gap by redirecting redevelopment agency tax increment revenues to pay for other budget priorities.

ABX1 26 eliminates all California redevelopment agencies (“RDAs”) effective October 1, 2011. However, ABX1 27 provides that an existing RDA can remain in existence and continue to operate after October 1 if certain steps are taken by the applicable local jurisdiction, including passage of a local ordinance requiring the applicable RDA to remit certain revenues to school entities and special districts. Taken together, the two bills effectively eliminate RDAs, unless these agencies “voluntarily” turn over certain tax increment revenues for other non-redevelopment local government uses.

In yesterday’s action, the Court blocked the “elimination” provisions of ABX1 26. The Court did, however, allow the “freeze” provisions of ABX1 26 (Health and Safety Code Sections 34161 to 34167) to take effect. Sections 34161 through 34167 prohibit all RDAs from taking on new obligations or making new agreements (for example incurring new indebtedness, transferring assets, acquiring or disposing of real property, entering into new or modifying existing contracts or adopting or amending redevelopment plans). Existing RDAs will remain in business while the Court’s stay is in effect but can only perform obligations or exercise rights under “enforceable obligations,” as defined in Health & Safety Code Section 34167, which already were in existence prior to the effective date of ABX1 26.

The Court also stayed the effectiveness of ABX1 27, which otherwise would allow RDAs to continue business as usual if the applicable local jurisdiction passed an ordinance requiring the local jurisdiction to remit certain revenues to school entities and special districts. Many local jurisdictions have already enacted such ordinances, or are in the process of doing so. The Court’s stay freezes the ability of local jurisdictions to enact such ordinances after yesterday’s date. It also could call into question the effectiveness of RDA actions taken after a local jurisdiction’s adoption of an ordinance pursuant to ABX1 27, if such actions do not fall within the scope of preexisting “enforceable obligations” under Health and Safety Code Sections 34161 through 34167.

The Court established an expedited briefing schedule through October 7, 2011 for the California Redevelopment Association’s and the League of California Cities’ legal challenge, with a stated intent to schedule oral argument as soon thereafter as possible. The Court anticipates rendering a decision on the merits of the petition prior to January 15, 2012. Until such time, the Court’s stay appears to greatly limit the ability of RDAs to enter into new deals or modify existing deals.

The Supreme Court’s action raises many challenging questions for any transaction involving RDA financing or participation set to close in 2011. It is very unclear what transactions can proceed in light of the stay issued yesterday. The stay may unintentionally affect the ability of many transactions to meet closing deadlines imposed by other governmental agencies such as the California Tax Credit Allocation Committee, the California Debt Limit Allocation Committee and the California Department of Housing and Community Development.

We will continue to examine the final provisions of ABX1 26 and ABX1 27 in light of yesterday’s ruling. If you would like to discuss the implications of these recent developments on your projects, please call Steve Ryan, Ofer Elitzur or Lisa Weil of our Affordable Housing Group or Margo Bradish or Andrew Fogg of our Land Use Group.